VAT — a summary

VAT reg­is­tered busi­ness­es act as unpaid tax col­lec­tors and are required to account both prompt­ly and accu­rate­ly for all the tax rev­enue col­lect­ed by them.

The VAT sys­tem is policed by HMRC with heavy penal­ties for breach­es of the leg­is­la­tion. Igno­rance is not an accept­able excuse for not com­ply­ing with the rules.

We high­light below some of the areas that you need to con­sid­er.

It is how­ev­er impor­tant for you to seek spe­cif­ic pro­fes­sion­al advice appro­pri­ate to your cir­cum­stances.

What is VAT?

Scope

A trans­ac­tion is with­in the scope of VAT if:

• there is a sup­ply of goods or ser­vices
• it was made in the UK
• it was made by a tax­able per­son
• it was made in the course or fur­ther­ance of busi­ness.

Inputs and outputs

Busi­ness­es charge VAT on their sales. This is known as out­put tax and the sales are referred to as out­puts. Sim­i­lar­ly VAT is charged on most goods and ser­vices pur­chased by a busi­ness. This is known as input tax.

The out­put tax is col­lect­ed from the cus­tomer by the busi­ness on behalf of HMRC and must be reg­u­lar­ly paid over to them by being includ­ed in a VAT return.

How­ev­er, the input tax suf­fered on the goods and ser­vices pur­chased can be deduct­ed from the amount of out­put tax owed, so that only the net tax due is paid to HMRC. Please note that cer­tain cat­e­gories of VAT can nev­er be reclaimed as input tax, such as that in respect of third par­ty UK busi­ness enter­tain­ment and most pur­chas­es of motor cars.

Points to consider

Supplies

Tax­able sup­plies are main­ly either stan­dard rat­ed (20%) or zero rat­ed (0%). There is, in addi­tion, a reduced rate of 5% which applies to a small num­ber of cer­tain spe­cif­ic tax­able sup­plies.

There are cer­tain sup­plies that are not tax­able and these are cat­e­gorised as exempt sup­plies.

There is an impor­tant dis­tinc­tion between exempt sup­plies and zero-rat­ed sup­plies:

• If your busi­ness is mak­ing only exempt sup­plies you can­not reg­is­ter for VAT and there­fore can­not recov­er any input tax.
• If your busi­ness is mak­ing zero-rat­ed sup­plies you should reg­is­ter for VAT as your sup­plies are tax­able (albeit at 0%) and recov­ery of input tax is allowed.

Registration — is it necessary?

You are required to reg­is­ter for VAT if the val­ue of your tax­able sup­plies exceeds a set thresh­old. This thresh­old is applied in two dif­fer­ent ways — either ‘look­ing back’ at the val­ue of tax­able sup­plies made in the pre­vi­ous 12 months, or ‘look­ing for­ward’ to tax­able sup­plies antic­i­pat­ed in the next 30 days alone. The applic­a­ble thresh­old is £90,000 with effect from 1 April 2024.

If you are mak­ing tax­able sup­plies below the thresh­old you can apply for vol­un­tary reg­is­tra­tion. This would allow you to reclaim input VAT, which could result in a repay­ment of VAT, for exam­ple, if your busi­ness was prin­ci­pal­ly mak­ing zero-rat­ed sup­plies.

If you have not yet start­ed to make tax­able sup­plies but intend to do so, you can apply for reg­is­tra­tion as an ‘intend­ing trad­er’. In this way input tax on start up expens­es can be recov­ered.

Taxable person

A tax­able per­son is any­one who makes or intends to make tax­able sup­plies and is reg­is­tered or required to be reg­is­tered for VAT. For the pur­pose of VAT reg­is­tra­tion a ‘per­son’ includes:

• indi­vid­u­als
• part­ner­ships
• com­pa­nies, clubs and asso­ci­a­tions
• char­i­ties.

If any indi­vid­ual car­ries on two or more busi­ness activ­i­ties all the sup­plies made in those busi­ness­es will be added togeth­er in deter­min­ing whether or not the indi­vid­ual is required to reg­is­ter for VAT.

Administration

Once reg­is­tered you must make a quar­ter­ly return to HMRC show­ing the amount of out­put tax to be account­ed for on sales income and the amount of deductible input tax on expen­di­ture, togeth­er with oth­er sta­tis­ti­cal infor­ma­tion. All busi­ness­es must file their returns online using soft­ware that meets require­ments set by HMRC.

In most cas­es, an online VAT return must be com­plet­ed and sub­mit­ted with­in one month and sev­en days from the end of the peri­od it cov­ers.

Elec­tron­ic pay­ment by the same due date is also com­pul­so­ry for all busi­ness­es.

Busi­ness­es mak­ing zero-rat­ed sup­plies and which receive net repay­ments of VAT may find it ben­e­fi­cial from a cash­flow per­spec­tive to sub­mit month­ly returns.

Busi­ness­es with expect­ed annu­al tax­able sup­plies not exceed­ing £1,350,000 may apply to join the annu­al account­ing scheme where­by they will make month­ly or quar­ter­ly pay­ments of VAT but will only have to com­plete one VAT return at the end of the year.

Busi­ness­es trad­ing below the £1,350,000 tax­able turnover thresh­old may also wish to con­sid­er the cash­flow ben­e­fits of join­ing the cash account­ing scheme, where­by VAT is account­ed for on sales and pur­chas­es on a cash book basis, rather than on an accru­als basis.

Record keeping

It is impor­tant that a VAT reg­is­tered busi­ness main­tains com­plete and up-to-date records. This includes details of all sup­plies, pur­chas­es and expens­es.

In addi­tion, a VAT account should be main­tained. This is a sum­ma­ry of out­put tax payable and input tax recov­er­able by the busi­ness. All busi­ness records should be kept for six years.

The above records must be main­tained in soft­ware that meets HMRC require­ments. HMRC does not pro­vide free soft­ware.

Inspection of records

The main­te­nance of records and cal­cu­la­tion of the VAT lia­bil­i­ty is the respon­si­bil­i­ty of the reg­is­tered per­son but HMRC will need to be able to check that the cor­rect amount of VAT is being paid. From time to time there­fore a VAT offi­cer may come and inspect the busi­ness records. This is known as a con­trol vis­it.

The VAT offi­cer will want to ensure that VAT rules are being applied cor­rect­ly and that the returns and oth­er VAT records are prop­er­ly main­tained.

How­ev­er, you should not assume that in the absence of any errors being dis­cov­ered dur­ing a vis­it, your busi­ness has been giv­en a clean bill of health by HMRC.

Offences and penalties

HMRC has wide pow­ers to penalise busi­ness­es that ignore or incor­rect­ly apply the VAT reg­u­la­tions. Penal­ties (and in some instances inter­est) can be levied by HMRC in respect of the fol­low­ing:

• late returns/payments
• late reg­is­tra­tion
• errors in returns.

Retail schemes

There are spe­cial schemes avail­able for retail­ers as it can be imprac­ti­cal for some retail­ers to main­tain all the records required of a VAT reg­is­tered trad­er.

Flat Rate scheme

This is a scheme allow­ing small­er busi­ness­es (with annu­al tax­able turnover not exceed­ing £150,000) to pay their VAT to HMRC cal­cu­lat­ed as a per­cent­age of their total busi­ness income. There­fore no spe­cif­ic claims to recov­er input tax need be made and this can reduce the record-keep­ing require­ments. The aim of the scheme is to sim­pli­fy the way small­er busi­ness­es account for VAT, but for some busi­ness­es it can actu­al­ly result in a reduc­tion in the over­all amount of VAT that is payable to HMRC.

Making Tax Digital for Business: VAT

Under Mak­ing Tax Dig­i­tal for VAT (MTD­fV), all VAT reg­is­tered busi­ness­es must keep dig­i­tal records for VAT pur­pos­es and pro­vide their VAT return infor­ma­tion to HMRC using MTD func­tion­al com­pat­i­ble soft­ware.

There are some exemp­tions from MTD­fV. How­ev­er, the exemp­tion cat­e­gories are tight­ly-drawn and are unlike­ly to be applic­a­ble to most VAT reg­is­tered busi­ness­es.